Malaysia at a Glance

Registration of work rules is not required. However, it is good to establish and implement work rules, policies, procedures, employee handbooks, etc. that are duly acknowledged by employees during the acceptance of an employment offer.

Employers can include non-compete clauses in employment contracts, but they must meet the exceptions outlined in the Contracts Act 1950. The enforceability of these clauses depends on the reasonableness of their terms, considering geographical limits, duration, and business nature.

Employers should avoid restricting general knowledge and skills, but can prohibit the use of confidential information and client lists. Balancing their interests with employee rights is crucial when formulating non-compete clauses.

Usually relevant to Manufacturing and Banks. No general requirements

There is no legal requirement to put an employee on probation before they are hired, although this is recommended as a best practice. There is also no fixed minimum or maximum probationary period that needs to be imposed, although a probationary period in the range of 3-6 months is common. It is best business practice to utilize a three-month period for non-executive and non-management employees, and a six-month period for executive and management employees. The purpose of instituting a probationary period is to protect your company, in the event an employee covered by the EA brings a complaint of dismissal without justification or excuse. In recent years, the ability for employees to lodge a complaint of dismissal without justification or excuse has led to a series of case law on the legality of termination of employment. If the EA stated there is a probationary clause for the employee, then the confirmation letter / extension letter must be distributed.

Examples include termination for misconduct and termination for redundancy. However, courts will examine the genuine nature of redundancy dismissals and seriousness of misconduct (e.g. habitual neglect of duties, dishonesty, fraud) with a high degree of scrutiny. Hence, for best business practice, employers should properly document misconduct and be able to support dismissals prior to any termination decisions. The EA doesn’t distinguish between probationers and confirmed employees. However, case law does provide that there is no “automatic confirmation” as a probationer who has not received a confirmation letter is still a probationer, even though the probationary period has lapsed, and the employer continued to retain the employee.

A probationer enjoys the same rights as a confirmed employee. Therefore, a probationer’s service must not be terminated without justification or excuse. A probationer continues to be a probationer even at the expiration of the probationary period, if at the end of the period, his/her services had neither been terminated nor confirmed.

Common practice in Malaysia is a 5-day work week, with total working hours ranging between 40 to 45 hours per week. Prior to the commencement of employment, the Company and employee will agree on the applicable working hours, which shall form part of the key terms of employment.

Where an employee works 5 days or fewer per week, the normal working hours are typically up to 9 hours per day, subject to a maximum of 45 hours per week.

Where an employee works more than 5 days per week, the normal working hours are typically up to 8 hours per day, subject to a maximum of 45 hours per week.

Employees are entitled to:

• At least one rest day per week
• A minimum break of 30 minutes after 5 consecutive hours of work

Any hours worked beyond the normal working hours will be treated as overtime and compensated in accordance with applicable laws and Company policy.

Standard working hours: Not exceeding eight hours in one day or 45 hours in one week. If an employee earns below MYR 4,000 per month, he/she will be eligible for overtime and follow provisions of the EA (Maximum 104 hours). If an employee earns more than MYR 4,000 per month, it depends on company policy for overtime per the contract. For EA employees, overtime should be paid according to when the overtime happened.

• Normal working days: One-and-a-half times the hourly rate of pay
• Rest days: If the duration does not exceed half the normal hours to work, the employee receives half day’s wages at the ordinary rate of pay; if the duration is more than half but does not exceed the normal hours of work, one day’s wages at the ordinary rate of pay. Two times the hourly rate of pay if exceed normal hours
• Public holidays: Two times the hourly rate of pay for 1st 8 hours. Three times the hourly rate of pay after exceed 8 hours

Termination is generally very difficult.

Terminating employees without valid reason may constitute unfair dismissal. Valid reasons for termination includes but are not limited to poor performance and misconduct. Employers can decide on the notice period required and have this agreed in the contract of employment. In case where the contract is silent on the length of notice period, the notice shall not be less than four weeks’ notice if employed less than two years, six weeks’ notice if employed more than two years but less than five years, eight weeks’ notice if employed more than five years

Court case due to unfair dismissal may lead to payment of 24 months of salary.

According to the EA – Less than 2 years: 4 weeks; 2 to 5 years: 6 weeks; 5 years or more: 8 weeks. It is always better to give more than two months of advance notice.

No special tax rules. There are resident versus non-resident rates.

30% of taxable income for non-resident rates. The tax calculations will be considered as resident if stay more than 182 days in Malaysia

• A minimum of one shareholder is required to form a legal entity, whether it’s a Private Limited Company, LLP, or any other structure. The shareholder can be an individual or another company.
• The minimum paid-up capital required for incorporation is Ringgit Malaysia 1 (RM 1). There are no strict debt/equity rules, making the process more flexible for businesses of various sizes and financial backgrounds.
• For a company to be fully operational, at least one director is required. Importantly, this director must be a resident of Malaysia. This ensures compliance with local laws and regulations.
• To comply with Malaysian regulations, companies must have at least one company secretary who resides in Malaysia. This individual will handle the administrative duties associated with the company’s legal and statutory obligations.
• While no specific insurance is required by law upon incorporation, it is recommended to have the following insurances for added protection:
  • Public liability insurance
  • Fire insurance
  • Commercial property insurance
• There is no requirement for a physical office space for the business to operate. However, a local registered office is necessary to meet the legal and regulatory requirements. This office serves as the official address for the company’s correspondence and legal documents.

The process of opening a local bank account for a business can take between 3 to 6 months depending on the bank and the structure of the company. While some banks may have faster procedures, others could require more time due to their internal policies or specific requirements for certain company types.

If a company meets the criteria for an audit exemption, they can submit a written statement to the Registrar along with the necessary certificate.

• Businesses must ensure their constitutional documents, including the memorandum and articles of association, are in order and up-to-date.
• All businesses operating in Malaysia are required to maintain proper accounting records for a period of 7 years. This is crucial for ensuring compliance with Malaysian tax laws and for audit purposes.
• Starting from 1 August 2024, businesses with an annual turnover exceeding MYR 100 million are required to implement electronic invoicing (e-invoicing) for Business-to-Business (B2B), Business-to-Consumer (B2C), and Business-to-Government (B2G) transactions. The implementation will be phased:
  • 1 August 2024: For businesses with an annual turnover above MYR 100 million.
  • 1 January 2025: For businesses with annual turnover between MYR 25 million and MYR 100 million.
  • 1 July 2025: For all other businesses.
• In Malaysia, a business’s fiscal year is based on its financial year. The deadline for filing the annual tax return is within 7 months from the closing date of the financial year.

Profit repatriation from Malaysia can be done through several common methods such as dividends, interest, and royalties. Malaysia does not impose restrictions on the repatriation of profits; however, withholding tax rates apply to these methods. It’s important for businesses to understand these tax implications before repatriating profits to their home country.

The widely accepted method for determining transfer pricing in Malaysia is the Transactional Net Margin Method (TNMM), which is used to establish arm’s length pricing for intercompany transactions.

Although it is not legally required for foreign companies to appoint a tax representative in Malaysia, it is highly beneficial. A tax representative can help ensure compliance with local tax regulations and provide valuable expertise, especially for businesses unfamiliar with Malaysian tax laws.

In Malaysia, both employees and employers are required to make contributions to several mandatory social security schemes. These include:

• Employee Provident Fund (EPF): A retirement savings scheme where both the employer and employee contribute.
• Social Security Organization (SOCSO): Provides social protection to employees in cases of accidents, illness, and death.
• Employment Insurance System (EIS): Provides benefits in cases of retrenchment or involuntary job loss.
• Income Tax (MTD): Monthly tax deductions that are contributed towards an employee’s income tax liabilities.
• Human Resource Development Fund (HRDF): Contributions to promote human resource development and training.

The following statutory benefit schemes apply in Malaysia to employers and employees, irrespective of whether they are an EA employee or a non-EA employee:

• Employees Provident Fund (EPF): EPF is a social security institution setup to provide retirement benefits to Malaysian workers. It still covers the pension funds, but now employees can withdraw their savings for specific purposes like house ownership and medical purposes. All employers and employees (except foreign workers) must contribute to EPF at the minimum rates of 12% to 13% (threshold is MYR 5,000 per month) by employers and 11% by employees of the monthly wages (applies to basic pay, fixed allowances and annual bonus).For foreign workers, effective October 2025, for the contribution month of November 2025, both the employee and employer contribution rates will be set at 2% of monthly wages. The expansion of mandatory contribution coverage will include all non-Malaysian citizen employees working in Malaysia (excluding domestic servants*) who hold a valid passport and an employment pass issued by the Immigration Department of Malaysia.

• Social Security Organization (SOCSO): SOCSO is a social insurance scheme that offers protection to employees who are Malaysian citizens, permanent residents and Foreign Workers. It covers industrial accidents, occupational diseases, accidents, invalidity or death. For employees who are less than 60 years of age (Category I), contributions payable by employers and employees are for the Employment Injury Scheme and Invalidity Scheme, where employer’s contribution is 1.75% and employee’s contribution is 0.50% of the employee’s monthly wage (capped at MYR 6,000).

All employees who have not reached the age of 60, must contribute under the First Category except for those who have attained 55 years of age and have no prior contributions before they reach 55 due to non-eligibility under the Employees’ Social Security Act, 1969.

For eligible new employees who are 55 years of age or 60 years old and above, they must be covered under the second category (Employment Injury Scheme only). PERKESO has also announced that effective from January 1st, 2019, employers in Malaysia who hire foreign workers with valid documents must register their employees under SOSCO and contribute to the Employment Injury Scheme (Second Category), where employer’s contribution is 1.25% and employee is 0%. The deduction amount is based on SOCSO’s contribution table.

• Employment Insurance System (EIS): SOCSO has implemented a compulsory EIS effective from Jan 2018. EIS is implemented as a platform to provide temporary financial assistance and job employment assistance to employees who lost their employment

Requirements:

• All employers are required to contribute for each staff (except for government sector, domestic helper and self-employment)
• Employees from age 18 to 60 years old (except 1st time contributors with age 57 and above)
• Applicable for local employees only

Monthly contribution:

• Employers and employees will each have to contribute 0.2% based on the monthly wages
• The contributions is capped at a salary level of MYR 6,000 a month, which means that although a person may earn more than MYR 6,000 a month, his/her contribution is fixed at 0.2% of MYR 6,000
• Employers must contribute within the stipulated period, which is on or before the 15th of the month following the wage month
• Employers must be registered at the respective statutory offices

• Human Resources Development Fund (HRDF): This is a mandatory levy payment collected by the HRDF from employers from all industries. It is for employee training and skills upgrading of the Malaysian workforce.

It is mandatory for companies with 10 or more local employees to contribute and the contribution rate is 1% of the monthly wages of each of their Malaysian employees. For companies with 5-9 local employees, it is optional and the contribution rate is 0.5%.

*The above rates serve as a broad guideline. Actual rates charged will differ.

• MTD (Monthly Tax Deduction): Employers are required to deduct and remit monthly income tax payments on behalf of employees. Employers must remit monthly tax deductions by the 15th of the following month.
• Form EA: At the end of each year, employers must provide a Form EA to employees, summarizing their earnings and tax deductions. This form must be distributed by the end of February. Employers must distribute Form EA to employees by the end of February each year.
• Form E: Employers are required to submit Form E to the Inland Revenue Board (LHDN) on an annual basis to report the total income and tax deductions for all employees. Employers are required to submit Form E annually to LHDN, typically by the end of June.

In Malaysia, salary is paid once a month, usually any time between the 25th to the end of month and shall not be paid later than the next pay cycle. One is to be paid within 7 days after the last day of any wage period (usually a month).

Payment method: Usually by inter-bank Giro directly to the employees’ bank accounts or bank in by cheque

Payment is for current month. Arrears for special case(s), e.g. new joiners who missed payroll cut-off

The wages must be paid by end of the day on employee’s officially last day (Termination)

Usually online or in PDF, but some companies may still give out carbon-sealed payslips.

Required information includes but is not limited to the below:

• Company name and address,
• Month of payslip,
• Staff personal information, i.e. name, employment ID, position/designation, department, date of join, statutory membership number(s),
• Monthly earnings, allowances, deductions,
• Year-to-date earnings, deductions and net pay,
• Monthly employer’s statutory contribution(s),
• YTD employer’s statutory contribution(s), and
• Disbursement details, i.e. employees’ bank account information.

Depends on the company

Scope: Aspects of effort required to deliver work depends on the staff’s grade level

Receive overtime payment for EA employees or depends on agreed contractual terms (or could be replacement time off). The common rate for OT during public holiday is triple the normal rate.

According to Section 60E of the Employment Act 1955, depends on length of service:

• Less than two years: 8 days per 12 calendar months;
• More than two years but less than five years: 12 days per 12 calendar months;
• More than five years: 16 days per 12 calendar months

Note: Company can provide more than the above provision by Law.

Annual leave can be pro-rated if an employee has worked less than a full year in that calendar year.

Some companies practice pro-rated or earned leave by quarterly basis.

Approval from immediate superior before utilization is required.

Carry-over rule for unused leave: Depends on company policy – some do not allow carry forward; some do but must be utilized within a specified period otherwise will be fortified.

Employers are required to pay out unused leave only in the case of termination/resignation.

If hospitalization is not required:

• Length of service of less than 2 years: 14 days
• More than 2 years but less than 5 years: 18 days
• More than 5 years: 22 days

The Amendment Act of 2022 provides a full 60 days of hospitalization leave in a calendar year on top of standard sick leave. The provision of sick leave remains unchanged.

Medical certificate is required for all occasions related to sick/medical leave.

All female employees, including non-EA employees, are entitled to 98 consecutive days of paid maternity leave (employer bears the cost) for birth of up to 5 surviving children.

Maternity leave is granted upon the birth or from the 22nd week of pregnancy (in case of premature birth).

A married male employee is entitled to 7 days of paid paternity leave for each birth, up to 5 births (irrespective of the number of spouses).

The male employee must have worked for the same company for at least 12 months before paternity leave can begin. He must also have told his employer about his wife’s pregnancy at least 30 days before she is due to give birth or as soon as possible after the baby is born.

The following leave may be given at the discretion of the employer:

• Marriage leave
• Compassionate leave
• Examination leave

Companies should at least cover the GP consultation fees under company’s medical benefit

Depending on industries, companies may provide accident or life insurance to employees

Housing allowance, transport allowance, children school fee, return flight ticket are available for expats